Sticking with a company after a deal ends is the fastest way to pay well over the odds, writes Mark Channing
LONG-TERM customers are being punished for their loyalty because banks, insurance companies, energy providers and phone companies keep the best deals and discounts for new business.
Up to 300,000 homeowners are stranded on expensive variable rate mortgages while first time buyers get lower rates, even though they are riskier for banks than the customers who have been on their books for several years.
Energy, broadband and television companies lure newcomers with deep discounts that quickly run out leaving customers with expensive contracts that run for 12-18 months.
Insurance companies automatically increase premiums for motor and home cover at renewal even though customers could get a lower premium by applying as a new customer. Health insurers leave customers on old and uncompetitive plans failing to mention that they have brought out value alternatives with more benefits.
Brendan Burgess, the founder of the personal finance website askaboutmoney.com, said: “It’s crazy that so many businesses, not just banks, treat new customers better than existing customers. If you are a loyal customer, you are going to get punished.”
We look at what staying loyal will cost you, and tell you what you can do about it.
Banks charge more interest to existing customers rather than new customers. For example, long term customers who have paid down a Permanent TSB mortgage so that it is worth 50%-60% of the value of their home would probably be on the bank’s standard variable rate of 4.5%. A new customer would pay 3.8% interest for the same mortgage, €1,200 a year less on €300,000 paid over 25 years.
Banks price mortgages according to risk, linking the interest rate to the loan-to-value (LTV) ratio. The lower the LTV, the lower you pay.
Ulster Bank is the only lender that allows existing customers to move to a lower rate when the LTV decreases as the mortgages are repaid and the house values rise. First time buyers borrowing up to 90% for example, would pay 4.5% interest on a variable rate. They could ask Ulster Bank to move to a 3.9% mortgage when the LTV slips below 80% and 3.8% when the LTV goes below 60%.
The transition is not automatic. You have to ask to move to the lower LTV band and support the application with an independent valuation of your home.
Burgess said he would recommend Ulster Bank over other providers, even those with cheaper rates because of the facility to move to a better deal as your accumulate equity in your home.
If you take out mortgage protection insurance which clears the loan if you die before it is paid off, banks are unlikely to reward you with the cheapest deal. They act as tied agents of a single insurer, rather than looking for the best rates in the market.
John Geraghty, of discount broker labrokers.ie, said: “Your loyalty is not being reflected in the price you pay for the policy.”
Energy providers give deep discounts to new customers but these offers run out after 12 months when customers are put on standard tariffs.
Energia is currently the cheapest electricity supplier, charging €1,059 for the first year for households with typical consumption patterns according to the price comparison site bonkers.ie. When the bill runs out, the introductory rate goes up by 194 a year.
Flogas, the cheapest gas only supplier, charges €816 a year for new customers with typical consumption. This increases by €144 in the second year if they chose to stay.
Simon Moynihan of bonkers.ie said: “Utility providers make their gravy from loyal customers on standard rates, which is most of their customer base.”
Moynihan said you may be able to have your loyalty rewarded by threatening to move to another provider when the introductory discounts run out.
“They have customer retention deals but you need to seek them out actively,” he said. “They are not going to ring you up actively and offer you the savings just for being a loyal customer.”
Dual fuel customers risk falling into the same trap because it’s cheaper to buy your gas and electricity from separate providers.
HOME AND CAR INSURANCE
Loyalty is seldom rewarded when policies fall due for renewal.
Jonathan Hehir of coverinaclick.ie, a broker, said: “It’s rare that the renewal price is the best price you’ll get. Nine times out of ten you’ll save money by shopping around.”
In many cases you’ll beat the renewal quote simply by re-entering your details with your existing insurer, as a new customer. “If you’re asked for your current insurer (when looking for a quote), just put in “not known” or “unlisted”, says Hehir. If the new customer premium is lower, ask your insurer to match it.
Loyalty means that homeowners miss out on competitive premiums for new customers.
“There are a number of insurers who recently entered the home insurance market. They have not been hit by flood claims over the last two or three years, so their premiums are lower”, said a spokesman for insuremyhouse.ie, a home insurance broker.
Fewer than two in ten households have switched home insurance in the past year, said the Competition and Consumer Protection Commission.
Health insurers are forbidden from rewarding loyal customers who are young, healthy and have never claimed. But they will leave loyal customers on outdated plans that have been overtaken by cheaper plans with the same level of benefits aimed at new customers.
Dermot Goode of totalhealthcover.ie, an advisor, said: “There are thousands of people who renew the same plans year after year, even though insurers have cheaper alternatives. If you don’t dig them out, insurance companies will happily renew you on the more expensive options”.
For example, Health Manager from Laya Healthcare costs €3,438 per adult a year. It’s newer Total Health Select scheme costs €1,675 and provides better overall cover, said Goode.